Walmart Canada stung as retail competition heats up

TORONTO – Walmart Canada is known as the industry giant who forces other retailers to lower their prices simply to keep up, but its latest results suggest stiff industry competition is taking a toll on the mass merchant.

Analysis: Both Loblaw and Metro are showing the strain in Canada’s hyper-competitive market. Read more

The unit of the world’s biggest retailer reported a third-quarter decline in customer traffic Wednesday and a drop in same-store sales, an important industry barometer of retail strength.

Like grocery rival Loblaw, Walmart is feeling an impact from the pricing war even as it helps to spur it.

“Gross profit rate decreased as we continue to invest in price for our customers,” Doug McMillon, head of Walmart International, said during a pre-recorded earnings call from Wal-Mart Stores Inc. on Thursday.

Net sales at Walmart Canada were up 3.8% due to expanded square footage, but same-store sales, which strips out any impact from added square footage, fell 1.3%. Customer traffic fell 1.5%.

Operating income grew 3.6% due to investments in new stores and “our rapidly growing e-commerce business,” Mr. McMillon said. The latter was a bright spot for the retailer, which recently relaunched its Walmart.ca website: sales rose 96% in the quarter compared with a year ago and traffic was up 42%.

While the Canadian unit does not break out full financial results, a decline in store foot traffic and same-store sales underscores the reality of a marketplace being flooded with a level of retail square footage that outstrips consumer demand.

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“Everybody is taking the pain, and it may be long-term pain, because they want to grow share in the market and there are going to be winners and losers,” said George Minakakis, chief executive officer at the Toronto-based consulting firm Inception Retail Group Inc.

Walmart’s aggressive push into the food business as a hedge against Target in this country seems to be working for the retailer, which gained 100 basis points of market share in food and consumables in the third quarter compared with the same period last year.

The number of Walmart Canada food stores in its 380-store network now vastly outstrips its traditional discount store business, with 227 grocery supercentres and 153 discount stores.

“I think at the end of the day you are going to see store closures and some consolidation,” Mr. Minakakis said. “The jury is still out on Target, but at the end of the day it will draw traffic, and the players that have been in the market the longest, they are going to have to convince their customers not to switch.”

Everybody is taking the pain, and it may be long-term pain

On Wednesday, Loblaw and Metro, Canada’s No. 1 and No. 3 grocery companies, both reported scaled-down quarterly profit and missed the market’s earnings expectations. Loblaw, which is bulking up its presence in the market with the pending $12.4-billion purchase of Shoppers Drug Mart, revised its 2013 profit outlook downward to flat from a prior outlook of mid-single digit growth.

No. 2 player Sobeys has shored up its Western Canadian footprint with the purchase of grocery rival Safeway.

Metro, a traditional grocery chain with stores in Quebec and Ontario, is regarded by many industry observers as the grocery retailer with the most to lose if it fails to scale up.

“While the other grocers are subject to similar competitive dynamics, we note that Metro has a disproportionate amount of earnings at risk in Quebec and does not have the opportunity to realize targeted synergies from acquisitions, as does Loblaw and (Sobeys’ owner) Empire Co.,” analyst Peter Sklar wrote in a note to clients.

Thursday’s Walmart Canada news came as parent company Wal-Mart Stores Inc. cut its annual profit forecast for the second time this year as the retailer faced pressure on its U.S. home turf from dollar store chains and aggressive price promotions from grocery retailers.

Profit in the year ending Jan. 2014 is expected to be US$5.01 to US$5.11, down from an August forecast of US$5.10 to US$5.30 and a February forecast of as much as US$5.40.

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